New U.S. Commercial Law Rules for Digital Assets Coming Soon

Changes to uniform U.S. state law commercial law rules for transactions in digital assets, including cryptocurrencies, tokens, electronic notes, and electronic chattel paper, are being finalized this summer and may be adopted in state legislatures as early as this fall. When adopted, these rules will create a uniform playing field with more certainty for transactions in digital assets — but can also hold some surprises for those not prepared. Everyone with an interest in digital assets — exchanges, custodians, holders, issuers, and lenders — should stop now to consider how these new rules will apply to their businesses and whether changes in their practices and contracts are warranted. They should also consider whether the new laws create new opportunities. Learn how the new rules apply to you and your business.

The proposed new laws are the work of the Uniform Commercial Code (UCC) Emerging Technologies Drafting Committee, a joint effort of the American Law Institute and the Uniform Law Commission. The committee developed a draft over two years with over 300 participants. The draft was approved at the American Law Institute Annual Meeting in May and was approved at the Uniform Law Commission Annual Meeting in July. It can now head to state legislatures for adoption. A few states have gotten ahead of the process, adopting earlier versions of the revisions into law as nonuniform versions of the UCC or adopting their own non-uniform approach.

The draft touches nearly every corner of the UCC. For example, and without being a comprehensive list, the draft

• changes the definition of “conspicuous” in Article 1 to remove specific characteristics like font size or color and replaces them with a statement that whether a term is conspicuous or not is a decision for the court
• throughout, replaces outdated references to writing and wet ink signatures with medium neutral references to records, authentication, and so on
• provides for electronic money and clarifies that an adoption by a government of a preexisting cryptocurrency does not make that cryptocurrency money for UCC purposes
• clarifies the definition of “negotiable instrument” in Article 3 to state that a negotiable instrument may contain a term that specifies the law that governs the promise or order and may contain a promise or undertaking to resolve in a specified forum a dispute concerning the promise or order
• updates certain provisions regarding electronic checks and payment orders to track current practice and technology
• preserves the existing general definition and safe harbor for “control” over electronic documents of title in Article 7 and adds new safe harbors that no longer rely on the concept of a single authoritative copy and are therefore more technology neutral; the new provisions also clarify how a person can have control through another
• provides additional support and clarification in part five of Article 8 to confirm that digital assets can be treated as financial assets and held in Article 8 securities accounts (this supports the existing practice of many in the industry and confirms that Article 8 is an appropriate tool for holding digital assets); the draft also confirms that digital assets subject to Article 8 are not subject to the general rules of Article 12 and are not treated as controllable electronic records for Article 12 purposes
• modifies the definition of control for securities and securities entitlements in 8-106 to clean up language about a party having control on behalf of another and to add the sentence that a person has control of a security entitlement if another person other than the transferor of an interest in the security entitlement acknowledges it has control on their behalf
• provides new rules for controllable accounts and controllable payment intangibles, which respectively are accounts with respect to which the account debtor has promised to pay the person in control of the record and payment intangibles in which the account debtor has promised to pay the person in control of the payments intangible
• amends the definition of chattel paper in several ways
• updates the definition of “control” for deposit accounts to make clear that if someone has control on your behalf, then you have control
• redefines the definition of “electronic chattel paper control” in 9-106 to illuminate or modify the current safe harbor and to provide updated rules for a situation in which there is not a single authoritative copy
• adds a new rule for control over electronic money, similar to the definition of control over a controllable electronic record, which focuses on the power to avail oneself of substantially all of the benefit and the exclusive power to prevent others from availing themselves of substantially all of the benefit and to transfer control
• updates the duties of a secured party in 9-208 to track the new types of collateral
• creates new choice of law rules for electronic chattel paper and hybrid chattel paper and also for controllable accounts and controllable payment intangibles
• updates perfection by filing and perfection by control rules to address new and revised forms of collateral
• amends 9–317 to include “takes free” rules for certain buyers of digital assets
• provides that a security interest in controllable accounts, controllable electronic records, and controllable payment intangibles may be perfected either by filing or control and that perfection by control has priority over perfection by filing
• amends Part VI of Article 9 to provide more detail on what is a recognized market for purposes of remedies on collateral
• creates Article 12 of the UCC to address controllable electronic records, which include certain digital assets held or traded on the blockchain
• defines “controllable electronic record,” creates a concept of control of controllable electronic records, and provides that a party who takes control of a controllable electronic record receives negotiability
• includes a new governing law provision applicable to Article 12

Sidley lawyers have been deeply involved in the drafting process for the new rules. We will be happy to discuss how they apply to you.